1. Investing Fundamentals
Equities and Asset Allocation

2. Learning Objectives Understand what securities are.
Know the basic asset classes.
Know what asset allocation is and why it is important.
Understand the basic investment choices.
Be able to create a basic investment plan.

3. Stocks (Equities) Represent ownership Types Common stock
Preferred stock

4. Equity Returns Dividends Change in price Optional, usually quarterly
Sometimes one-time event
“guaranteed”, fixed for preferred stock
“Yield” = dividend / price
Change in price
Based on investors’ view of a firm’s future
Will cause a capital gain or loss

5. Average Annual Return Since 1925
Risk – By Asset Class
Worst Annual Return
Since 1925
Average Annual Return Since 1925
Stocks
-43.4%
(-67.6% worst 12 mo.)
9.6% (162.9% best 12 mo.)
Bonds
-7.8%
5.5%
Cash
.1%
3.7%
Sources: personal.fidelity.com, Morgan Stanley, Federal Reserve – St. Louis

6. Asset Allocation Depends upon investment objectives
Which asset class is best/worst if your investment objective is:
Preserving your money (it can not go down)
You want to maximize your investment growth
You want money available for emergencies
You want income now to live on
E.g. retirees, widows and orphans

7. Asset Allocation Percent of portfolio in each asset class
Determined by:
Risk you are willing to take
Investment objectives
Rule of thumb
Cash = 3 to 6 months of expenses
(for emergencies)
% Equities = 100 – your age

8. Buying and Selling Securities
Brokerage Firm — firm that buys and sells securities for individual and institutional investors.
E*trade: An Online Brokerage Firm
Choosing a brokerage firm, and a specific stockbroker, is one of the most important decisions investors make.

9. Buying and Selling Securities
Placing an Order
Market order instructs a brokerage firm to trade at the best available price
Lowest if buying
Highest if selling
Limit order sets a limit on amount willing to pay or sell at
An investor’s request to buy or sell stock at the current market price is called a market order, which instructs a brokerage firm to obtain the highest price - if the investor is selling, or the lowest price - if the investor is buying.

10. How’s the Market Doing? Bull market Bear market
Need to measure the market

11. Stock Indexes Attempt to measure activity of the market
Most common indices
Dow Jones Industrial Average (Dow or DJIA)
Standard & Poor’s 500 (S&P 500)
NASDAQ composite
Foreign indices
DAX (Germany)
FTSE, FT-100 or “Footsie” (London),
Nikkei (Tokyo)

12. Funds Mutual Funds Index funds / Managed Funds Load / No Load Funds
Investors pool their money to buy investments (stocks and bonds)
Investors become part owners of a large number of securities,
lessen their individual risk
Index funds / Managed Funds
Load / No Load Funds
ETFs
Invested like a mutual fund
Trade like a stock

13. The Fed announced a rate hike.
Discussion
The Fed announced a rate hike.
What do you expect to happen to bond yields?
What do you expect to happen to bond prices?
If long-term yields do not increase, what might that tell you?
There is a drought in California
What businesses will be affected?